THE ROLE OF COMMERCIAL BANKS IN FINANCING BUILDING PROJECTS IN NIGERIA

 

 

CHAPTER ONE

INTRODUCTION

1.1   BACKGROUND TO THE STUDY

Commercial banks are important financial intermediaries serving the general public in any society. In most cases, commercial banks hold more assets than any other financial institution. In some cases even more than central bank. Apart from their many functions, commercial banks facilitate growth and development. Banks lends in many areas or sectors of the economy. Viewed from the building and construction sector, they contribute to investment, employment creation, and by extension, the process of infrastructure and economic growth. However, the researcher is examining the roles of the commercial banks in Nigeria in financing building and construction projects in Nigeria (Farrel, 1985).

The building and construction industry in both developed and developing countries may be viewed as that sector of the economy which, through planning, design, construction, maintenance and repair, and operation, transforms various resources into constructed facilities. The types of public and private facilities produced range from residential and non-residential buildings to heavy construction, and these physical facilities play a critical and highly visible role in the process of development (Kheni et al., 2008). The major participants from the building industry include the architects, engineers, management consultants, general contractors, heavy construction contractors, special trade contractors or subcontractors, and construction workers, along with the owners, operators, and users of the constructed facility.

Olowo-okere (1985), (cited in Eshofonie, 2008) asserted that most countries put over 55% of their gross domestic investment into the creation of physical facilities, including infrastructure that is necessary for development. The building sector has various levels of manpower ranging from highly skilled professionals to completely unskilled labourers. In developing countries, physical construction activities alone provide between 2 and 6% of the employment demands of the nation and the subsidiary activities provide an additional 2 to 4%, while in the developed countries the figure rises to between 6 to 10% and 4 to  6 % (Cockburn and Charles, 1970; Okeola, 2009). Ibironke (2004) and Shittu and Shehu (2010) stated that the building industry plays a key role in satisfying a wide range of physical, economic and social needs and contributes significantly to the fulfillment of various major national goals.

The commercial banks form an important source by which many investors get funds to finance building and other real property projects. Commercial banks are money creating financial institutions that perform three major functions, namely acceptance of deposits, granting or loans and the operators of the payments and settlements mechanism.

The major issue in building, real estate development and investment is finance. There is no iota of doubt that funding is an important factor in real estate development and building projects. The complexity and to a large extent, its capital intensive nature demands proper and adequate funding to make it realizable. The terms and availability of the needed funds determine the trend of building operation. Availability and easy accessibility of building finance in sufficient quantity will definitely accelerate all forms of property development. Building financing is concerned with the production of finance for building houses and office complexes which are basic necessities in a growing economy like Nigeria. The benefits to be derived from a rise in building financing in Nigeria are many and include;

1. Increased rural and urban houses for the teaming Nigerian population.

2. The construction of industrial estate for the localization of industries and commerce.

3. An increase in employment for those in the construction industry.

The sourcing of funds for investment in building development poses a great deal of problem for the developer. This is largely due to economic instability and stringent measures imposed by most financial institutions. This is compounded by the fact that the interest rate structure has had an unfavourable impact on funding the development of building sector. Since the financing of building development is a long term project, it has necessitated the high interest rate that is being charged on the funds provided for such development purposes. Hines (1995) revealed that six major building financing methods are used across the world namely; Joint Venture, Equity and Debt Financing, Sale-lease Back Financing, Advance Payment of key money and Sale of Securities.

1.2   STATEMENT OF THE PROBLEM

Over the years, the government had been the major player in the area of building and housing development in Nigeria, by providing direct finance to the builders for previous housing schemes. This was embedded in the housing policy of past administrations but today, the dwindling nature of revenue accruing to the government, coupled with gross mismanagement and misappropriation of public funds and revenue has prohibited the ability of the government to continue to play her role as before (Nubi, 2000). The mortgage finance institutions are faced with certain problems of low level of awareness of the services rendered by the institutions, bureaucracy in the granting and disbursement of mortgage loans to the borrowers, misunderstanding of the banking terms by the depositors and the public due to the used of technical and professional terms which are not understood by a layman and problem of repayment of loans by the borrowers. Commercial banks has the key player in the financial sector has contributed to the development of various sectors of the Nigerian economy by funding. However, the researcher will analyze the role of commercial banks in financing building projects in Nigeria.

1.3   OBJECTIVES OF THE STUDY

The general objective of this study is to analyze the role of commercial banks in financing building projects in Nigeria and the following are the specific objectives:

1.  To examine the role of commercial banks in financing building projects in Nigeria.

2.  To identify the role of other mortgage financial institutions in financing building projects in Nigeria.

3.  To identify the factors limiting financing of building projects in Nigeria.

1.4   RESEARCH QUESTIONS

1.  What are the role of commercial banks in financing building projects in Nigeria?

2.  What are the roles of other mortgage financial institutions in financing building projects in Nigeria?

3.  What are the factors limiting financing of building projects in Nigeria?

1.6   SIGNIFICANCE OF THE STUDY

This study has the following significance:

1.  This study will educate the general public, stakeholder in real estate, government and policy makers on the importance of building development and housing and the need for adequate financing of the sector considering the roles of commercial banks and other mortgage financial institutions.

2.  Findings from this study will be useful for future researches has it will constitute part of the empirical literature making it a guide for future researchers.

1.7   SCOPE/LIMITATIONS OF THE STUDY

This study on the role of commercial banks in financing building projects in Nigeria will cover all the financial investment in building and real estate in Nigeria considering the contributions of the commercial banks to the sector. It will also cover the activities of other mortgage financial institution in financing building development in Nigeria.

LIMITATION OF STUDY

Financial constraint- Insufficient fund tends to impede the efficiency of the researcher in sourcing for the relevant materials, literature or information and in the process of data collection (internet, questionnaire and interview).

 Time constraint- The researcher will simultaneously engage in this study with other academic work. This consequently will cut down on the time devoted for the research work.

1.8   DEFINITION OF TERMS

Building: a structure with a roof and walls, such as a house or factory.

Financing: provide funding for (a person or project)

Real estate: property consisting of land or buildings.

Commercial banks: ' A financial institution that provides services, such as accepting deposits, giving business loans and auto loans, mortgage lending, and basic investment products like savings accounts and certificates of deposit.

REFERENCES

Cockburn, A., and Charles, S. (1970). Construction in Overseas Development (A Search for Appropriate Aid and Trade Measure for the 1970’s), Overseas Development Institute Ltd., London. Pp. 1-20.

 Farrel T (1985). The role of commercial banks in financial system. Mimeo, 1985.

Ibironke, O. T. (2004). Building economics (Birnin-Kebbi, Nigeria: TimlabQuanticost).

Kheni, N., Gibb, A. G. F., and Dainty, A. R. J. (2008). Health and safety management in developing countries: A Study of construction SMEs in Ghana. Construction Management and Economics, 26(11):1159-1169.

Nubi A. O. (2002). Financing low Income Housing in Nigerian Cities: A conference Paper on Perspectives, Issues and Challenges at Obafemi Awolowo University, October, 2001

Okeola, O. G., (2009). Occupational Health and Safety (OHS) Assessment in the Construction Industry. 1st Annual Civil Engineering Conference Proceeding. University of Ilorin, Nigeria, 26-28 August, pp: 236-246.

Olowo-Okere, E. O. (1985). Construction industry in Nigeria. Journal for Building and Civil Engineering Contractors in Nigeria, 2(2):6–10.

Shittu, A. A., and Shehu, M. A. (2010). Impact of building and construction investment on the Nigerian economy during the military era (1991 – 1998) and civilian era (1999 - 2006). Nigerian Journal of Construction Technology and Management, 11(1&2):89-98.

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